Assignment:
You have just been appointed as the auditor of Gritty Manufacturing Ltd and you are in the process of planning your first audit. Gritty manufactures security cameras and is a part of the electronics industry.
Gritty's operations consist of a factory and a head office which is located in the Sydney suburb of Alexandria. Gritty has distribution outlets in each capital city of Australia, as well as sales agents scattered throughout South East Asia, the USA and Western Europe.There has been heavy capital expenditure on the factory at Alexandria in recent years, and the security camera industry has in recent years been increasingly competitive and volatile. There is also a lot of discounting undertaken by manufacturers of inferior quality products. The industry faces problems with changes to technology, government legislation and health and safety issues for the staff in the different jurisdictions in which Gritty operates. As a result, obsolete stock is a problem for the security camera industry.
The CEO of Gritty is Fred McKenzie, a radio engineer who started the company 15 years ago. Fred is heavily reliant on his accountant, Mrs Norris, as he has minimal understanding of accounting.
The previous auditors have informed you that there were a number of issues with the previousaudit. They also inform you that the accounting methods used for the valuation of foreign currency profits and losses were unreliable and of concern.
Your discussions with the Alexandria production manager, Dennis Watkins, reveal that he has a very stressful time managing production levels, with constant concerns of both over and under production, given the volatile nature of the industry.
Gritty sells its products overseas through foreign agents and it also has an internet website. You note that this year there is a large amount of unsold inventory in Gritty's USA warehouse. The inventory was to be sold via a Government contract for use in US prisons, but the US authorities decided at the last minute to upgrade to a more advanced security camera product. Gritty is yet to decide whether the cameras can be sold elsewhere, as they were produced to work with specific US electrical requirements.
Gritty has a bank loan with a contract that requires them to maintain a current ratio of 1.5 to 1 and a quick ratio of 0.9 to 1.
In a discussion with the accountant you discover that the company is experiencing cash flow problems, both with the failure to secure the contract with the US prisons and due to foreign exchange losses.
Required:
You are the senior auditor planning the audit of Gritty Ltd.
1. Identify at least ten (10) issues that increase the inherent risk of material misstatement
2. For each of the issues you have identified, explain why they require special attention; and
3. Briefly outline one audit procedure that would address this inherent risk
Use the following column headings:
Inherent risk Reason Procedure